ASSIGNMENT 2 BBF304/05 CORPORATE FINANCE QUESTION 2 (25 MARKS) (UNIT 3) You are currently only invested in the KAF Dana Fund (aside from risk-free securities). The expected return for KAF Dana Fund is 13.50% with a volatility of 17.10%. Your broker suggests that you add Pacific Murni Berhad (PMURNI) to your portfolio. With a volatility of 54% PMURNI has an expected return of 18.00%. There is a zero correlation between PMURNI and KAF Dana Fund. Currently, the Malaysia Treasury Bill yields approximate 3.20%. (a) Show your working to prove whether your broker is right. (5 marks) (b) You follow your broker's advice and make a substantial investment in PMURNI stock so that, considering only your risky investments, 65% is in the KAF Dana Fund and 35% is in PMURNI stock. When you tell your finance tutor about your investment, your tutor says that you made a mistake and should reduce your investment in PMURNI. Justify your opinion whether your finance tutor is right. (7 marks)